国际财务管理 课后习题解答

CHAPTER1GLOBALIZATIONANDTHEMULTINATIONALFIRM

SUGGESTEDANSWERSTOEND-OF-CHAPTERQUESTIONS

QUESTIONS

1.Whyisitimportanttostudyinternationalfinancialmanagement?

Answer:Wearenowlivinginaworldwhereallthemajoreconomicfunctions,i.e.,

consumption,production,andinvestment,arehighlyglobalized.Itisthusessentialfor

financialmanagerstofullyunderstandvitalinternationaldimensionsoffinancialmanagement.

Thisglobalshiftisinmarkedcontrasttoasituationthatexistedwhentheauthorsofthisbook

werelearningfinancesometwentyyearsago.Atthattime,mostprofessorscustomarily

(andsafely,tosomeextent)ignoredinternationalaspectsoffinance.Thismodeofoperation

hasbecomeuntenablesincethen.

2.Howisinternationalfinancialmanagementdifferentfromdomesticfinancial

management?

Answer:Therearethreemajordimensionsthatsetapartinternationalfinancefromdomestic

finance.Theyare:

1.foreignexchangeandpoliticalrisks,

2.marketimperfections,and

3.expandedopportunityset.

3.Discussthethreemajortrendsthathaveprevailedininternationalbusinessduringthelast

twodecades.

Answer:The1980sbroughtarapidintegrationofinternationalcapitalandfinancialmarkets.

Impetusforglobalizedfinancialmarketsinitiallycamefromthegovernmentsofmajor

countriesthathadbeguntoderegulatetheirforeignexchangeandcapitalmarkets.The

economicintegrationandglobalizationthatbeganintheeightiesispickingupspeedinthe

1990sviaprivatization.Privatizationistheprocessbywhichacountrydivestsitselfofthe

ownershipandoperationofabusinessventurebyturningitovertothefreemarketsystem.

Lastly,tradeliberalizationandeconomicintegrationcontinuedtoproceedatboththeregional

andgloballevels.

4.Howisacountry'seconomicwell-beingenhancedthroughfreeinternationaltradein

goodsandservices?

Answer:AccordingtoDavidRicardo,withfreeinternationaltrade,itismutuallybeneficial

fortwocountriestoeachspecializeintheproductionofthegoodsthatitcanproduce

relativelymostefficientlyandthentradethosegoods.Bydoingso,thetwocountriescan

increasetheircombinedproduction,whichallowsbothcountriestoconsumemoreofboth

goods.Thisargumentremainsvalidevenifacountrycanproducebothgoodsmore

efficientlythantheothercountry.Internationaltradeisnota4zero-sum9gameinwhichone

countrybenefitsattheexpenseofanothercountry.Rather,internationaltradecouldbean

'increasing-sum'gameatwhichallplayersbecomewinners.

5.Whatconsiderationsmightlimittheextenttowhichthetheoryofcomparativeadvantageis

realistic?

Answer:Thetheoryofcomparativeadvantagewasoriginallyadvancedbythenineteenth

centuryeconomistDavidRicardoasanexplanationforwhynationstradewithoneanother.

Thetheoryclaimsthateconomicwell-beingisenhancedifeachcountry'scitizensproduce

whattheyhaveacomparativeadvantageinproducingrelativetothecitizensofother

countries,andthentradeproducts.Underlyingthetheoryaretheassumptionsoffreetrade

betweennationsandthatthefactorsofproduction(land,buildings,labor,technology,and

capital)arerelativelyimmobile.Totheextentthattheseassumptionsdonothold,thetheory

ofcomparativeadvantagewillnotrealisticallydescribeinternationaltrade.

6.Whataremultinationalcorporations(MNCs)andwhateconomicrolesdotheyplay?

Answer:Amultinationalcorporation(MNC)canbedefinedasabusinessfirmincorporated

inonecountrythathasproductionandsalesoperationsinseveralothercountries.Indeed,

someMNCshaveoperationsindozensofdifferentcountries.MNCsobtainfinancingfrom

majormoneycentersaroundtheworldinmanydifferentcurrenciestofinancetheiroperations.

Globaloperationsforcethetreasurer'sofficetoestablishinternationalbankingrelationships,

toplaceshort-termfundsinseveralcurrencydenominations,andtoeffectivelymanage

foreignexchangerisk.

7.Mr.RossPerot,aformerPresidentialcandidateoftheReformParty,whichisathird

politicalpartyintheUnitedStates,hadstronglyobjectedtothecreationoftheNorth

AmericanTradeAgreement(NAFTA),whichnonethelesswasinauguratedin1994,forthe

fearoflosingAmericanjobstoMexicowhereitismuchcheapertohireworkers.Whatare

themeritsanddemeritsofMr.PerofspositiononNAFTA?Consideringtherecenteconomic

developmentsinNorthAmerica,howwouldyouassessMr.Perot'spositiononNAFTA?

Answer:SincetheinceptionofNAFTA,manyAmericancompaniesindeedhaveinvested

heavilyinMexico,sometimesrelocatingproductionfromtheUnitedStatestoMexico.

AlthoughthismighthavetemporarilycausedunemploymentofsomeAmericanworkers,they

wereeventuallyrehiredbyotherindustriesoftenforhigherwages.Currently,the

unemploymentrateintheU.S.isquitelowbyhistoricalstandard.Atthesametime,Mexico

hasbeenexperiencingamajoreconomicboom.ItseemsclearthatbothMexicoandtheU.S.

havebenefitedfromNAFTA.Mr.Perofsconcernappearstohavebeenillfounded.

8.In1995,aworkinggroupofFrenchchiefexecutiveofficerswassetupbythe

ConfederationofFrenchIndustry(CNPF)andtheFrenchAssociationofPrivateCompanies

(AFEP)tostudytheFrenchcorporategovernancestructure.Thegroupreportedthefollowing,

amongotherthings“Theboardofdirectorsshouldnotsimplyaimatmaximizingsharevalues

asintheU.K.andtheU.S.Rather,itsgoalshouldbetoservethecompany,whoseinterests

shouldbeclearlydistinguishedfromthoseofitsshareholders,employees,creditors,suppliers

andclientsbutstillequatedwiththeirgeneralcommoninterest,whichistosafeguardthe

prosperityandcontinuityofthecompany”.Evaluatetheaboverecommendationofthe

workinggroup.

Answer:TherecommendationsoftheFrenchworkinggroupclearlyshowthatshareholder

wealthmaximizationisnotauniversallyacceptedgoalofcorporatemanagement,especially

outsidetheUnitedStatesandpossiblyafewotherAnglo-Saxoncountriesincludingthe

UnitedKingdomandCanada.Tosomeextent,thismayreflectthefactthatshareownershipis

notwidespreadinmostothercountries.InFrance,about15%ofhouseholdsownshares.

9.Emphasizingtheimportanceofvoluntarycompliance,asopposedtoenforcement,inthe

aftermathofcorporatescandals,e.g.,EnronandWorldCom,U.S.PresidentGeorgeW.Bush

statedthatwhiletougherlawsmighthelp,"ultimately,theethicsofAmericanbusiness

dependsontheconscienceofAmerica'sbusinessleaders?5Describeyourviewonthis

statement.

Answer:Therecanbedifferentanswerstothisquestion.Ifbusinessleadersalwaysbehave

withahighethicalstandard,manyofthecorporatescandalswehaveseenlatelymightnot

havehappened.Sincewecannotfullydependontheethicalbehavioronthepartofbusiness

leaders,thesocietyshouldprotectitselfbyadoptingtherules/regulationsandgovernance

structurethatwouldinducebusinessleaderstobehaveintheinterestofthesocietyatlarge.

10.SupposeyouareinterestedininvestinginsharesofNokiaCorporationofFinland,which

isaworldleaderinwirelesscommunication.Butbeforeyoumakeinvestmentdecision,you

wouldliketolearnaboutthecompany.VisitthewebsiteofCNNFinancialnetwork

()andcollectinformationaboutNokia,includingtherecentstockprice

historyandanalysts'viewsofthecompany.Discusswhatyoulearnaboutthecompany.Also

discusshowtheinstantaneousaccesstoinformationviainternetwouldaffectthenatureand

workingsoffinancialmarkets.

Answer:Asstudentsmighthavelearnedfromvisitingthewebsite,informationisreadily

availableevenforforeigncompanieslikeNokia.Readyaccesstointernationalinformation

helpsintegratefinancialmarkets,dismantlingbarrierstointernationalinvestmentand

financing.Integration,however,mayhelpafinancialshockinonemarkettobetransmittedto

othermarkets.

MINICASE:NIKE'SDECISION

Nike,aU.S.-basedcompanywithagloballyrecognizedbrandname,manufactures

athleticshoesinsuchAsiandevelopingcountriesasChina,Indonesia,andVietnamusing

subcontractors,andsellstheproductsintheU.S.andforeignmarkets.Thecompanyhasno

productionfacilitiesintheUnitedStates.IneachofthoseAsiancountrieswhereNikehas

productionfacilities,theratesofunemploymentandunderemploymentarequitehigh.The

wagerateisverylowinthosecountriesbytheU.S.standard;hourlywagerateinthe

manufacturingsectorislessthanonedollarineachofthosecountries,whichiscompared

withabout$18intheU.S.Inaddition,workersinthosecountriesoftenareoperatinginpoor

andunhealthyenvironmentsandtheirrightsarenotwellprotected.Understandably,Asian

hostcountriesareeagertoattractforeigninvestmentslikeNike'stodeveloptheireconomies

andraisethelivingstandardsoftheircitizens.Recently,however,Nikecameundera

world-widecriticismforitspracticeofhiringworkersforsuchalowpay,46nexttonothing^^in

thewordsofcritics,andcondoningpoorworkingconditionsinhostcountries.

Evaluateanddiscussvarious4ethical9aswellaseconomicramificationsofNike's

decisiontoinvestinthoseAsiancountries.

SuggestedSolutiontoNike'sDecision

Obviously,Nike'sinvestmentsinsuchAsiancountriesasChina,Indonesia,and

Vietnamweremotivatedtotakeadvantageoflowlaborcostsinthosecountries.WhileNike

wascriticizedfbrthepoorworkingconditionsfbritsworkers,thecompanyhasrecognized

theproblemandhassubstantiallyimprovedtheworkingenvironmentsrecently.Although

Nike'sworkersgetpaidverylowwagesbytheWesternstandard,theyprobablyaremaking

substantiallymorethantheirlocalcompatriotswhoareeitherunder-orunemployed.While

Nike'sdetractorsmayhavevalidpoints,oneshouldnotignorethefactthatthecompanyis

makingcontributionstotheeconomicwelfareofthoseAsiancountriesbycreatingjob

opportunities.

CHAPTER1ATHEORYOFCOMPARATIVEADVANTAGE

SUGGESTEDSOLUTIONSTOAPPENDIXPROBLEMS

PROBLEMS

1.CountryCcanproducesevenpoundsoffoodorfouryardsoftextilesperunitofinput.

Computetheopportunitycostofproducingfoodinsteadoftextiles.Similarly,computethe

opportunitycostofproducingtextilesinsteadoffood.

Solution:Theopportunitycostofproducingfoodinsteadoftextilesisoneyardoftextiles

per7/4=1.75poundsoffood.Apoundoffoodhasanoppoitunitycostof4/7=.57yardsof

textiles.

2.Considertheno-tradcinput/outputsituationpresentedinthefollowingtableforCountries

XandY.Assumingthatfreetradeisallowed,developascenariothatwillbenefitthe

citizensofbothcountries.

INPUT/OUTPUTWITHOUTTRADE

Country

XYTotal

I.UnitsofInput

(000,000)

Food7060

Textiles4030

II.OutputperUnitofInput

(lbsoryards)

Food175

Textiles52

III.TotalOutput

(lbsoryards)

(000,000)

Food1,1903001,490

Textiles20060260

IV.Consumption

(lbsoryards)

(000,000)

Food1,1903001,490

Textiles20060260

Solution:

Examinationoftheno-tradeinput/outputtableindicatesthatCountryXhasan

absoluteadvantageintheproductionoffoodandtextiles.CountryXcan"tradeofT,one

unitofproductionneededtoproduce17poundsoffoodforfiveyardsoftextiles.Thus,a

yardoftextileshasanopportunitycostof17/5=3.40poundsoffood,orapoundoffoodhas

anopportunitycostof5/17=.29yardsoftextiles.Analogously,CountryYhasan

opportunitycostof5/2=2.50poundsoffoodperyardoftextiles,or2/5=.40yardsof

textilesperpoundoffood.Intermsofopportunitycost,itisclearthatCountryXis

relativelymoreefficientinproducingfoodandCountryYisrelativelymoreefficientin

producingtextiles.Thus,CountryX(Y)hasacomparativeadvantageinproducingfood

(textile)iscomparisontoCountryY(X).

Whentherearenorestrictionsorimpedimentstofreetradetheeconomic-wellbeingof

thecitizensofbothcountriesisenhancedthroughtrade.SupposethatCountryXshifts

20,000,000unitsfromtheproductionoftextilestotheproductionoffoodwhereithasa

comparativeadvantageandthatCountryYshifts60,000,000unitsfromtheproductionof

foodtotheproductionoftextileswhereithasacomparativeadvantage.Totaloutputwill

nowbe(90,000,000x17=)1,530,000,000poundsoffoodand[(20,000,000x5

=100,000,000)+(90,000,000x2=180,000,000)=]280,000,000yardsoftextiles.Further

supposethatCountryXandCountryYagreeonapriceof3.00poundsoffoodforoneyard

oftextiles,andthatCountryXsellsCountryY330,000,000poundsoffoodfbr110,000,000

yardsoftextiles.Underfreetrade,thefollowingtableshowsthatthecitizensofCountryX

(Y)haveincreasedtheirconsumptionoffoodby10,000,000(30,000,000)poundsandtextiles

by10,000,000(10,000,000)yards.

INPUT/OUTPUTWITHFREETRADE

Country

XYTotal

I.UnitsofInput

(000,000)

Food900

Textiles2090

II.OutputperUnitofInput

(lbsoryards)

Food175

Textiles52

III.TotalOutput

(lbsoryards)

(000,000)

Food1,53001,530

Textiles100180280

IV.Consumption

(lbsoryards)

(000,000)

Food1,2003301,530

Textiles21070280

CHAPTER2INTERNATIONALMONETARYSYSTEM

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.ExplainGresham'sLaw.

Answer:Gresham'slawreferstothephenomenonthatbad(abundant)moneydrivesgood

(scarce)moneyoutofcirculation.Thiskindofphenomenonwasoftenobservedunderthe

bimetallicstandardunderwhichbothgoldandsilverwereusedasmeansofpayments,with

theexchangeratebetweenthetwometalsfixed.

2.Explainthemechanismwhichrestoresthebalanceofpaymentsequilibriumwhenitis

disturbedunderthegoldstandard.

Answer:Theadjustmentmechanismunderthegoldstandardisreferredtoasthe

price-specie-flowmechanismexpoundedbyDavidHume.Underthegoldstandard,abalance

ofpaymentdisequilibriumwillbecorrectedbyacounter-flowofgold.SupposethattheU.S.

importsmorefromtheU.K.thanitexportstothelatter.Undertheclassicalgoldstandard,

gold,whichistheonlymeansofinternationalpayments,willflowfromtheU.S.totheU.K.

Asaresult,theU.S.(U.K.)willexperienceadecrease(increase)inmoneysupply.This

meansthatthepricelevelwilltendtofallintheU.S.andriseintheU.K.Consequently,the

U.S.productsbecomemorecompetitiveintheexportmarket,whileU.K.productsbecome

lesscompetitive.ThischangewillimproveU.S.balanceofpaymentsandatthesametime

hurttheU.K.balanceofpayments,eventuallyeliminatingtheinitialBOPdisequilibrium.

3.Supposethatthepoundispeggedtogoldat6poundsperounce,whereasthefrancis

peggedtogoldat12francsperounce.This,ofcourse,impliesthattheequilibriumexchange

rateshouldbetwofrancsperpound.Ifthecurrentmarketexchangerateis2.2francsper

pound,howwouldyoutakeadvantageofthissituation?Whatwouldbetheeffectofshipping

costs?

Answer:Supposethatyouneedtobuy6poundsusingFrenchfrancs.Ifyoubuy6pounds

directlyintheforeignexchangemarket,itwillcostyou13.2francs.Alternatively,youcan

firstbuyanounceofgoldfor12francsinFranceandthenshipittoEnglandandsellitfor6

pounds.Inthiscase,itonlycostsyou12francstobuy6pounds.Itisthusbeneficialtoship

goldduetotheoverpricingofthepound.Ofcourse,youcanmakeanarbitrageprofitby

selling6poundsfor13.2francsintheforeignexchangemarket.Thearbitrageprofitwillbe

1.2francs.Sofar,weassumedthatshippingcostsdonotexist.Ifitcostsmorethan1.2francs

toshipanounceofgold,therewillbenoarbitrageprofit.

4.Discusstheadvantagesanddisadvantagesofthegoldstandard.

Answer:Theadvantagesofthegoldstandardinclude:(I)sincethesupplyofgoldis

restricted,countriescannothavehighinflation;(2)anyBOPdisequilibriumcanbecorrected

automaticallythroughcross-borderflowsofgold.Ontheotherhand,themaindisadvantages

ofthegoldstandardare:(I)theworldeconomycanbesubjecttodeflationarypressuredueto

restrictedsupplyofgold;(ii)thegoldstandarditselfhasnomechanismtoenforcetherulesof

thegame,and,asaresult,countriesmaypursueeconomicpolicies(likede-monetizationof

gold)thatareincompatiblewiththegoldstandard.

5.WhatwerethemainobjectivesoftheBrettonWoodssystem?

Answer:ThemainobjectivesoftheBrettonWoodssystemaretoachieveexchangerate

stabilityandpromoteinternationaltradeanddevelopment.

6.OnecansaythattheBrettonWoodssystemwasprogrammedtoaneventualdemise.

Commentonthisproposition.

Answer:TheanswertothisquestionisrelatedtotheTriffinparadox.Underthe

gold-exchangesystem,thereserve-currencycountryshouldrunBOPdeficitstosupply

reservestotheworldeconomy,butifthedeficitsarelargeandpersistent,theycanleadtoa

crisisofconfidenceinthereservecurrencyitself,eventuallycausingthedownfallofthe

system.

7.Explainhowthespecialdrawingrights(SDR)isconstructed.Also,discussthe

circumstancesunderwhichtheSDRwascreated.

Answer:SDRwascreatedbytheIMFin1970asanewreserveasset,partiallytoalleviate

thepressureontheU.S.dollarasthekeyreservecurrency.TheSDRisabasketcurrency

comprisedoffivemajorcurrencies,i.e.,U.S.dollar,Germanmark,Japaneseyen,French

franc,andBritishpound.Currently,thedollarreceivesa40%weight,mark21%,yen17%,

franc11%,andpound11%.Theweightsfordifferentcurrenciestendtochangeovertime,

reflectingtherelativeimportanceofeachcurrencyininternationaltradeandfinance.

8.ExplainthearrangementsandworkingsoftheEuropeanMonetarySystem(EMS).

Answer:EMSwaslaunchedin1979inorderto(I)establishazoneofmonetarystabilityin

Europe,(ii)coordinateexchangeratepoliciesagainstthenon-EMScurrencies,and(iii)pave

thewayfortheeventualEuropeanmonetaryunion.ThemaininstrumentsofEMSarethe

EuropeanCurrencyUnit(ECU)andtheExchangeRateMechanism(ERM).LikeSDR,the

ECUisabasketcurrencyconstructedasaweightedaverageofcurrenciesofEUmember

countries.TheECUworksastheaccountingunitofEMSandplaysanimportantroleinthe

workingsoftheERM.TheERMistheprocedurebywhichEMSmembercountriesmanage

theirexchangerates.TheERMisbasedonaparitygridsystem,withparitygridsfirst

computedbydefiningtheparvaluesofEMScurrenciesintermsoftheECU.Ifacountry's

ECUmarketexchangeratedivergesfromthecentralratebyasmuchasthemaximum

allowabledeviation,thecountryhastoadjustitspoliciestomaintainitsparvaluesrelativeto

othercurrencies.EMSachievedacompletemonetaryunionin1999whenthecommon

Europeancurrency,theeuro,wasadopted.

9.Thereareargumentsfbrandagainstthealternativeexchangerateregimes.

a.Listtheadvantagesoftheflexibleexchangerateregime.

b.Criticizetheflexibleexchangerateregimefromtheviewpointoftheproponentsofthe

fixedexchangerateregime.

c.Rebuttheabovecriticismfromtheviewpointoftheproponentsoftheflexibleexchange

rateregime.

Answer:a.Theadvantagesoftheflexibleexchangeratesysteminclude:(I)automatic

achievementofbalanceofpaymentsequilibriumand(ii)maintenanceofnationalpolicy

autonomy.

b.Ifexchangeratesarefluctuatingrandomly,thatmaydiscourageinternationaltradeand

encouragemarketsegmentation.This,inturn,mayleadtosuboptimalallocationofresources,

c.Economicagentscanhedgeexchangeriskbymeansofforwardcontractsandother

techniques.Theydon'thavetobearitiftheychoosenotto.Inaddition,underafixed

exchangerateregime,governmentsoftenrestrictinternationaltradeinordertomaintainthe

exchangerate.Thisisaself-defeatingmeasure.What'sgoodaboutthefixedexchangerateif

internationaltradeneedtoberestricted?

10.Inanintegratedworldfinancialmarket,afinancialcrisisinacountrycanbequickly

transmittedtoothercountries,causingaglobalcrisis.Whatkindofmeasureswouldyou

proposetopreventtherecurrenceofaAsia-typecrisis.

Answer:First,thereshouldbeamultinationalsafetynettosafeguardtheworldfinancial

systemfromtheAsia-typecrisis.Second,internationalinstitutionslikeIMFandtheWorld

Bankshouldmonitorproblematiccountriesmorecloselyandprovidetimelyadvicetothose

countries.Countriesshouldberequiredtofullydiscloseeconomicandfinancialinformation

sothatdevaluationsurprisescanbeprevented.Third,countriesshoulddependmoreon

domesticsavingsandlong-tennforeigninvestments,ratherthanshort-termportfoliocapital.

Therecanbeothersuggestions.

11.Discussthecriteriaforatgood,internationalmonetarysystem.

Answer:Agoodinternationalmonetarysystemshouldprovide(i)sufficientliquiditytothe

worldeconomy,(ii)smoothadjustmentstoBOPdisequilibriumasitarises,and(iii)safeguard

againstthecrisisofconfidenceinthesystem.

12.Oncecapitalmarketsareintegrated,itisdifficultforacountrytomaintainafixed

exchangerate.Explainwhythismaybeso.

Answer:Oncecapitalmarketsareintegratedinternationally,vastamountsofmoneymayflow

inandoutofacountryinashorttimeperiod.Thiswillmakeitverydifficultforthecountry

tomaintainafixedexchangerate.

13.AssessthepossibilityfortheeurotobecomeanotherglobalcurrencyrivalingtheU.S.

dollar.Iftheeuroreallybecomesaglobalcurrency,whatimpactwillithaveontheU.S.

dollarandtheworldeconomy?

Answer:Inlightofthelargetransactionsdomainoftheeuro,whichiscomparabletothatof

theU.S.dollar,andthemandatefortheEuropeanCentralBank(ECB)toguaranteethe

monetarystabilityinEurope,theeuroislikelytobecomeanotherglobalcurrencyovertime.

AmajoruncertaintyaboutthisprospectisthelackofpoliticalintegrationofEurope.If

Europebecomespoliticallymoreintegrated,theeuroismorelikelytobecomeaglobal

currency.Iftheeurobecomesaglobalcurrency,itwillcomeattheexpenseofthedollar.

Currently,theU.S.derivessubstantialbenefitsfromthedollar'sstatusasthedominantglobal

currency-fbrinstance,theU.S.canruntradedeficitswithouthavingtomaintainsubstantial

foreignexchangereserves,cancarryoutinternationalcommercialandfinancialtransactions

indollarswithoutbearingexchangerisk,etc.Iftheeuroistobeusedasamajordenomination,

reserve,andinvoicecurrencyintheworldeconomy,dollar-basedagentswillstarttobear

moreexchangerisk,amongotherthings.

MINICASE:WILLTHEUNITEDKINGDOMJOINTHEEUROCLUB?

WhentheeurowasintroducedinJanuary1999,theUnitedKingdomwasconspicuously

absentfromthelistofEuropeancountriesadoptingthecommoncurrency.Althoughthe

currentLaborgovernmentledbyPrimeMinisterTonyBlairappearstobeinfavorofjoining

theeuroclub,itisnotclearatthemomentifthatwillactuallyhappen.TheoppositionTory

partyisnotinfavorofadoptingtheeuroandthusgivingupmonetarysovereigntyofthe

country.Thepublicopinionisalsodividedontheissue.

WhethertheUnitedKingdomwilleventuallyjointheeuroclubisamatterof

considerableimportanceforthefutureofEuropeanUnionaswellasthatoftheUnited

Kingdom.ThejoiningoftheUnitedKingdomwithitssophisticatedfinanceindustrywill

mostcertainlyhelppropeltheeurointoaglobalcun*encystatusrivalingtheU.S.dollar.The

UnitedKingdomonitspartwillfirmlyjointheprocessofeconomicandpolitical

unionizationofEurope,abandoningitstraditionalbalancingrole.

Investigatethepolitical,economicandhistoricalsituationssuiToundingtheBritish

participationintheEuropeaneconomicandmonetaryintegrationandwriteyourown

assessmentoftheprospectofBritishjoiningtheeuroclub.Indongso,assessfromtheBritish

perspective,amongotherthings,(1)potentialbenefitsandcostsofadoptingtheeuro,(2)

economicandpoliticalconstraintsfacingthecountry,and(3)thepotentialimpactofBritish

adoptionoftheeuroontheinternationalfinancialsystem,includingtheroleoftheU.S.

dollar.

SuggestedSolutiontoWilltheUnitedKingdomJointheEuroClub?

WhethertheU.K.willjointheeuroclubwillbeapoliticalasmuchaseconomic

decision.Recently,theU.K.economywasconvergingwiththoseofeuro-zonecountries.

Economicconditionsintermsofgovernmentbudgets,interestrates,andinflationrateare

becomingsimilartothoseineuro-zonecountries.Onaneconomicground,thisconvergence

iscreatingaconditionthatisconducivetoU.K/sjoiningtheeuroclub.Asrecentlypointed

outbyWimDuisenberg,thePresidentoftheEuropeanCentralBank,Britishoppositionto

joiningtheeuroclubismore“psycho・political“thanjustifiedoneconomicgrounds.Since

manypoliticalleadersinFranceandGermanyconsideradoptionoftheeuroasasteptoward

theEuropeanpoliticalunion,theU.K.islikelytojointheeuro-zoneifitispreparedtojoin

theEuropeanpoliticalunionaswell.OncetheU.K.joinstheeuro-zone,theeurowillno

doubtbecomeaglobalcurrencyrivalingtheU.S.dollar.

CHAPTER3BALANCEOFPAYMENTS

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.Definethebalanceofpayments.

Answer:Thebalanceofpayments(BOP)canbedefinedasthestatisticalrecordofa

country'sinternationaltransactionsoveracertainperiodoftimepresentedintheformof

double-entrybookkeeping.

2.Whywoulditbeuseful